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Dollar Rallies to More than Five Year High as Payrolls Approach

Dollar Rallies to More than Five Year High as Payrolls Approach

2014-11-07 05:56:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Rallies to More than Five Year High as Payrolls Approach
  • Euro Drops after Draghi Reiterates Stimulus Commitment
  • British Pound Most Fundamentally At-Risk Currency Next Week

Dollar Rallies to More than Five Year High as Payrolls Approach

While many of the top financial headlines are cheering the fresh record highs for US equities, a comparatively impressive move has developed for the FX market’s leader: the US Dollar. The Greenback climbed against all of its major counterparts this past session despite an unflattering economic docket and a move seeking higher return (historically the bane of this traditional safe haven). If this is the currency’s performance through a tepid docket and weakened fundamental backdrop, what happens if a high-profile release like today’s NFPs offers a clear signal and motivation?

The scope of the Dollar’s performance can be sussed from the two-year low in EURUSD, the drive above 115 to six-year highs for USDJPY, and GBPUSD’s slip to 14-month lows amongst others. However, the Dow Jones FXCM Dollar Index (ticker = USDollar) may offer the more complete picture as it charged above 11,300 this morning to clear the highest level it has seen since May 2009. The 8.9 percent climb the currency has piloted the past four months endured without the support of its normal fundamental pillars. In fact, it has progressed through direct opposition to the standard guidelines…or at least it seems that way. On the ‘risk’ front, the S&P 500’s return to record highs and VIX volatility index retreat seems to secure a positive lean for market sentiment. However, we find a different evaluation in other market benchmarks. The FX-based volatility reading (the one-month equivalent to its stock counterpart) for example currently stands at a 13-month highs.

Meanwhile, interest rate expectations did indeed collapse through October alongside capital markets – forecasts dropped to levels last seen in May 2013 according to Fed Fund and Eurodollar futures – but they have marked a significant recover the past few weeks with a particular acceleration noted after the FOMC rate decision. There is a disparity between ‘top line’ readings of these high-level fundamental themes and what the more qualitative measures insinuate. Will the NFPs help reconcile the discrepancy? Can it? See today’s Strategy Video for more.

Euro Drops after Draghi Reiterates Stimulus Commitment

Following the fireworks in last week’s FOMC and Bank of Japan rate decisions, the European Central Bank’s policy decision was marked for top event risk this past session. Pressure for the policy group to do more to bolster the region’s economic and financial health has built from outside of the Euro-area. In fact, the OECD Thursday repeat its 1.1 percent 2015 GDP forecast for the aggregate economy (downgraded in September from a previous 1.7 percent outlook) and warned that this key player posed a threat to the global recovery effort. The remedy as many see it is more stimulus, but the ECB has already unleashed a round of rate cuts, new LTROs and covered bond purchases amongst other efforts this year. The next move would be an escalation to a full-scale bond purchasing program; but recent internal dissension and a lack of clarity on how such a program could work stayed President Draghi’s hand. Nevertheless, he reiterated his commitment to turn the tides.

British Pound Most Fundamentally At-Risk Currency Next Week

Despite the Bank of England’s decision to hold policy unchanged – thereby precluding any useful updates on policy views and forecasts from the MPC – the Pound would still suffer a tumble this past session. Cable (GBPUSD) in particular dropped 145 or 0.9 percent. Rate expectations as of late have cooled materially with the rate forecast now pricing in full confidence of the first hike around the mid-point of next year. Are the markets too hawkish still or are they now too dovish? Next week’s BoE Quarterly Inflation report will give us a clear update.

Yen Crosses Climb Doesn’t Carry the Same Impetus as Initial QE Run

The USDJPY has surged back 115, and the comparisons to late-2012, early-2013 are inevitable. In the liftoff from sub-80 to eventually overtake 100, the market was building its drive through anticipation of a massive and open-ended BoJ stimulus program. ‘Anticipation’ was the operable word here. Two-thirds of the rally surrounding the central bank’s first foray into mass-scale easing came before it was implemented. This time around, there is no anticipation. USDJPY has rallied over 600 pips on sheer surprise. And markets aren’t surprised for long.

Canadian Dollar: Beware Employment Data Volatility

As usual, most of the headlines for ‘jobs data’ covers the US NFPs. However, Canada is due to release its own October labor report Friday morning at 13:30 GMT. And, this series has a recent history of considerable volatility. Heading into the release, a consensus forecast for a 5,000-net loss in jobs opens the door widely to the impact of a surprise. The previous release was 74,100 versus 20,000 expected.

Emerging Markets Following a Different Path than S&P 500, Ruble Can’t Catch a Break

Emerging markets are not following the US equity indexes step-for-step. In fact, the MSCI EM ETF has stalled in its October recovery and has slipped back below 41. Dour global growth forecasts and a wavering confidence in the central bank safety net adds to local concerns like capital outflow from Russia. The Russian Ruble hit another record low this morning with USDRUB gapping to 47.46as they try to approach free float.

Gold’s Critical Technical Break in Good Fundamental Company

Last week, gold slipped below a four-year low $1,185 after the Fed kept its hawkish push to close out QE3 and move closer to the eventual and inevitable first rate hike in its next policy regime. Since then, the metal has lost further ground. With five-year lows in ETF holdings, a strengthening dollar and doubt that a systemic crisis will revive its unique haven appeal; gold will struggle to recover.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

22:30

AUD

AiG Performance of Construction Index (OCT)

59.1

Has been rising this year; thus showing strength in the construction and manufacturing sector

23:50

JPY

Japan Buying Foreign Bonds (Yen) (OCT 31)

¥40.6B

Foreign buying bonds and stocks were greater than the previous weeks. Japan buying of foreign stocks and bonds were greater than the previous week as well.

23:50

JPY

Foreign Buying Japan Bonds (Yen) (OCT 31)

¥49.0B

23:50

JPY

Japan Buying Foreign Stocks (Yen) (OCT 31)

¥197.1B

23:50

JPY

Foreign Buying Japan Stocks (Yen) (OCT 31)

¥178.0B

5:30

AUD

Foreign Reserves (Australian dollar) (OCT)

A$60.9B

Last month’s reading was higher than the reading from the beginning of year

6:45

CHF

Unemployment Rate s.a. (OCT)

3.20%

3.20%

Has been declining this year despite anemic growth in the Eurozone, Switzerland’s largest export market

6:45

CHF

Unemployment Rate (OCT)

3.10%

3.00%

7:00

EUR

German Industrial Production n.s.a. and w.d.a. (YoY) (SEP)

-0.60%

-2.80%

Has been showing contraction in industrial production since September

7:00

EUR

German Industrial Production s.a. (MoM) (SEP)

2.00%

-4.00%

7:00

EUR

German Trade Balance (Euro) (SEP)

19.0B

14.0B

Important figure as Germany which is the Eurozone’s largest economy is an export dependent economy. The trade balance has been declining since September and current account has been declining this year

7:00

EUR

German Current Account (Euro) (SEP)

18.0B

10.3B

7:00

EUR

German Exports s.a. (MoM) (SEP)

2.30%

-5.80%

7:00

EUR

German Imports s.a. (MoM) (SEP)

1.10%

-1.30%

8:00

CHF

Foreign Currency Reserves (OCT)

462.2B

Has been rising this year

9:30

GBP

Total Trade Balance (Pounds) (SEP)

-£2300

-£1917

Exports are important to the UK GDP. If exports are shown to be weakening at a rapid pace, it might make the BOE hold off rate increases

9:30

GBP

Visible Trade Balance (Pounds) (SEP)

-£9500

-£9099

9:30

GBP

Trade Balance Non EU (Pounds) (SEP)

-£3700

-£3587

13:30

USD

Unemployment Rate (OCT)

5.90%

5.90%

US’s unemployment rate has been declining this year. Raising interest rates are greatly dependent on how well the labor market is performing. Despite the decline in the unemployment rate, the labor force participation rate is at a decade low

13:30

USD

Change in Non-farm Payrolls (OCT)

235K

248K

13:30

USD

Labor Force Participation Rate (OCT)

62.70%

13:30

USD

Change in Private Payrolls (OCT)

223K

236K

13:30

USD

Change in Household Employment (OCT)

232K

13:30

CAD

Unemployment Rate (OCT)

6.90%

6.80%

The unemployment rate in Canada has been declining this year. The BOC will look at how well its labor market performs when deciding on monetary policy .

13:30

CAD

Full Time Employment Change (OCT)

69.3

13:30

CAD

Net Change in Employment (OCT)

-5.0K

74.1K

13:30

CAD

Part Time Employment Change (OCT)

4.8

13:30

CAD

Participation Rate (OCT)

66

66

20:00

USD

Consumer Credit (SEP)

$16.00B

$13.525B

Has been declining this year

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

RBA Statement on Monetary Policy

10:15

GBP

BOE Governor Mark Carney Speaks in Paris

11:00

EUR

ECB Announces 3-Year LTRO Repayment

14:15

USD

Fed's Evans Speaks at 10th Annual Community Bankers USD Symposium

15:15

USD

Fed's Yellen Speaks on Policy Since the Crisis in Paris

19:30

USD

Fed's Tarullo Speaks on Community Banking Via Video

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

14.0100

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

6.1750

7.2900

Resist 1

13.6800

2.3000

11.8750

7.8075

1.3250

Resist 1

7.5000

6.0900

7.0000

Spot

13.6388

2.2647

11.2617

7.7529

1.2960

Spot

7.4348

6.0094

6.8655

Support 1

13.0300

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.8000

6.3145

Support 2

12.8350

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

5.7300

6.1300

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.2483

1.5947

116.41

0.9829

1.1519

0.8652

0.7777

143.90

1170.60

Res 2

1.2456

1.5919

116.09

0.9805

1.1496

0.8630

0.7755

143.55

1163.67

Res 1

1.2429

1.5891

115.78

0.9781

1.1474

0.8608

0.7734

143.21

1156.74

Spot

1.2376

1.5835

115.15

0.9733

1.1429

0.8564

0.7690

142.51

1142.87

Supp 1

1.2323

1.5779

114.52

0.9685

1.1384

0.8520

0.7646

141.81

1129.00

Supp 2

1.2296

1.5751

114.21

0.9661

1.1362

0.8498

0.7625

141.47

1122.07

Supp 3

1.2269

1.5723

113.89

0.9637

1.1339

0.8476

0.7603

141.12

1115.14

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

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